Luisa Beltran

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NEW YORK (CBS.MW) -- Merrill Lynch Chairman Stan O'Neal said Wednesday that he believes the probe into mutual-fund trading practices will likely broaden.

O'Neal, speaking at a banking and financial services conference sponsored by the investment firm
MER,
+27.69%,
said he doesn't know where the investigation will lead.

"I can't tell you where the whole process goes because it hasn't been defined yet," O'Neal said. "I do believe that it will widen beyond trading practices."

The Merrill executive said there has yet to be "clarity" on the scope of the mutual-fund probe and what the focus of the review within the industry will be.

In September, New York Attorney General Eliot Spitzer launched an investigation into the $7 trillion mutual fund industry when he unveiled a $40 million settlement with hedge fund Canary Capital Partners.

Merrill, which has not been charged in the scandal, has fired three brokers for violating the firm's prohibition against market timing. Earlier this week, Morgan Stanley
MWD,
+0.90%
reached a $50 million settlement with the Securities and Exchange Commission over its mutual-fund sales practices.

When asked whether the investigation will likely lead to a settlement similar to the $1.4 billion resolution adopted by 10 Wall Street investment banks last year to clean up analyst research, O'Neal said the financial industry is ultimately responsible.

"Legislation and regulation are important and necessary, but at the end of the day it is going to be one we will have to figure out," O'Neal said.

Shares of Merrill shed 24 cents to close at $55.28 Wednesday, while Morgan Stanley fell by 43 cents to $53.39. Prudential added 20 cents to $37.20.

More subpoenas issued

Separately, Fidelity Investments confirmed that it has received another subpoena from William Galvin, Massachusetts's secretary of the commonwealth.

Galvin is seeking more information about Fidelity's trading practices, a Fidelity spokeswoman said Wednesday. "It was not a statement of allegation," she said.

Hancock confirmed Wednesday that it also received a subpoena. The firm said it was responding to information requests from regulators examining market-timing and related trading issues.

"It is our understanding that these requests are not the result of any specific information or allegations concerning John Hancock," the company said in a statement Wednesday. Hancock added that it's cooperating with regulators.

Regulators are looking at whether these Boston firms are experiencing trading improprieties similar to those found at Putnam Investments, the Globe said. A spokesman for Galvin declined comment.

Putnam, a unit of insurer Marsh & McLennan
MMC,
+2.54%,
settled civil fraud charges with the SEC last week. Federal regulators said the fund giant knew for years that some money managers were profiting from prohibited short-term trades in its international funds, but did not take measures to detect and deter the improprieties.

Massachusetts regulators are still pursuing similar charges against Putnam.

Strong executive could be charged

Anthony D'Amato, a member of Strong's office of the chief executive, allegedly met with Canary head Edward Stern to discuss allowing Canary to conduct rapid trades in shares of Strong funds, the Journal quoted sources as saying.

A Strong spokeswoman declined to discuss the reports but said D'Amato is still employed at the company.

Strong has admitted investing in the firm's funds for himself, his family and friends, and that "a small number" were next-day transactions. See full story.

Investigators for Spitzer, who is expected to bring charges against Richard Strong, have said their office may charge another executive from Strong Capital. See full story. A spokesperson in Spitzer's office could not be reached for comment on Wednesday.

Spitzer also has said he intends to bring charges against Pilgrim Baxter, which ousted its founders last week. See full story.

Privately held Strong is one of four companies - including Bank of America
BAC,
+4.96%,
Bank One
ONE,
+2.08%
and Janus Capital Group
JNS
-- named by Spitzer in his original complaint against Canary, the hedge fund, alleging privileged trading arrangements with the fund companies that allowed Canary to skim profits from other shareholders through improper rapid-fire fund trading.

Strong Capital on Wednesday reiterated its commitment to strengthening its organization and reconstituting its board. The company is working with David Ruder, former chairman of the Securities and Exchange Commission, and Richard Andersen, ex-supervisory examiner for the SEC's Midwest's regional office to ensure compliance.

"Management issues are a top priority for this group and related decisions are subject to their review," the company said in a statement.

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